The Affordable Care Act (ACA) imposes responsibilities on certain employers. It also offers a tax break to certain employers. Who these employers are depends on the number of employees. For purposes of these numbers, the term “employees” includes full-time workers and full-time equivalent (FTE) employees.
Here’s how to determine your numbers and what this means to you.
Determining the number of employees
How many employees do you have? It’s not a body count. The way to figure this depends on the purpose for which the number of employees is being used:
- Small employer health insurance credit. Add up the total hours of service for which you pay wages to employees during the year (but not more than 2,080 hours for any employee), and divide that amount by 2,080. If the result is not a whole number, round to the next lowest whole number. If the result is less than one, however, round up to one FTE. However, the following individuals are not considered employees for purposes of the credit: owners of the small business (sole proprietors, partners, shareholders owning more than 2% of an S corporation or more than 5% of a C corporation); spouses of these owners; and family members of these owners (a child, grandchild, sibling or step-sibling, parent or ancestor of a parent, a step-parent, niece or nephew, aunt or uncle, son-in-law or daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law, or a spouse of any of these family members).
- Employer mandate. Count the number of full-time employees (those who work on average 30 hours or more per week for more than 120 days per year). (You must use this definition of a full-time employee even though your company policy treats someone working only 30 hours a week as a part-timer.) Add to this number the part-timers whose hours combine to make full-time employees. Add all the hours that part-timers work in a month and divide by 120. You can use a special calculator for this purpose.
Observation: A full-timer for the credit is someone who works 40 hours a week while a full-timer for the employer mandate is someone who works 30 hours a week.
You are not subject to the employer mandate requiring you to offer coverage to full-timers. Having only a handful of employees potentially makes you eligible for the small employer health insurance credit. To qualify, you must:
- Pay at least half the premiums for employees
- Have average annual wages below a set amount ($25,900 in 2016)
- Buy coverage through the Small Business Health Option Program (SHOP)
- Not have claimed the credit in the previous two consecutive years. Thus, even if you meet the other conditions you won’t qualify for the credit in 2016 if you claimed it in 2014 and 2015.
Again, you have no coverage obligation, but may qualify for a reduced credit if you buy coverage through a SHOP and haven’t taken the credit in the previous two consecutive years. The credit phases out for having more than 10 FTEs. Also, the credit phases out if average annual employee wages exceed a set amount; no partial credit applies unless average annual wages are below a set amount ($51,800 for 2016).
This is the dead zone: you have no coverage burden under ACA, but you also have no benefit. You are not required to offer affordable minimum health coverage to full-time employees. Of course, many small businesses with this size payroll do have health coverage for their staff.
You cannot qualify for the tax credit for your premiums. However, they are fully deductible.
If you have insurance for your staff, the insurance company provides annual information returns about this coverage. However, if you have a self-insured health plan, such as a health reimbursement arrangement, you must file an annual information return:
- Form 1095-B goes to the employee
- Form 1094-B (with copies of Form 1095-B) goes to the IRS
50 or more employees
The employer mandate applies to applicable large employers (ALEs). ALEs must offer affordable minimum essential health coverage to their full-time employees and their dependents or pay a penalty (“shared responsibility penalty”). The penalty for 2016 (the numbers will adjust for inflation for 2017) is either:
- $2,160 per employee above 30 employees if no coverage is offered
- $3,240 per employee if coverage is too expensive for a low-wage worker who then obtains coverage (and the premium tax credit) through the government’s Marketplace
ALEs must also provide annual information returns:
- Form 1095-C goes to the employee
- Form 1094-C (along with copies of Form 1095-C) goes to the IRS
Your ACA obligations for 2017 are based on your 2016 payroll. Work with a tax professional to determine whether you need to offer coverage so you can shop now for the best plan to suit your budget.